-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FkpCCvD/g3TgTx/R+Q8nIyKC4BCLMVTGmtQTx1dDpUYbo6NixB4DtVBC2saPb6eD 4mUueKVaDWEYHUpAZK9Krw== 0000912057-97-019557.txt : 19970616 0000912057-97-019557.hdr.sgml : 19970616 ACCESSION NUMBER: 0000912057-97-019557 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970511 FILED AS OF DATE: 19970605 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COSTCO COMPANIES INC CENTRAL INDEX KEY: 0000909832 STANDARD INDUSTRIAL CLASSIFICATION: 5331 IRS NUMBER: 330572969 STATE OF INCORPORATION: CA FISCAL YEAR END: 0830 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-04355 FILM NUMBER: 97619396 BUSINESS ADDRESS: STREET 1: 999 LAKE DRIVE CITY: ISSAQUAH STATE: WA ZIP: 98027- BUSINESS PHONE: (206)-313-8100 MAIL ADDRESS: STREET 1: 999 LAKE DRIVE CITY: ISSAQUAD STATE: WA ZIP: 98027 FORMER COMPANY: FORMER CONFORMED NAME: PRICE/COSTCO INC DATE OF NAME CHANGE: 19930728 10-Q 1 10-Q - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 11, 1997 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-20355 COSTCO COMPANIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0572969 (State or other (I.R.S. Employer jurisdiction of Identification incorporation or No.) organization)
999 LAKE DRIVE ISSAQUAH, WASHINGTON 98027 (Address of principal executive office) (206) 313-8100 (Registrant's telephone number, including area code) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ NO / / The registrant had 212,524,549 common shares, par value $.01, outstanding at May 30, 1997. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- COSTCO COMPANIES, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q PART I--FINANCIAL INFORMATION
PAGE ----- ITEM 1--FINANCIAL STATEMENTS............................................................................... 3 Condensed Consolidated Balance Sheets.................................................................... 11 Condensed Consolidated Statements of Operations.......................................................... 12 Condensed Consolidated Statements of Cash Flows.......................................................... 13 Notes to Condensed Consolidated Financial Statements..................................................... 14 ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 3 PART II--OTHER INFORMATION ITEM 1--LEGAL PROCEEDINGS.................................................................................. 8 ITEM 2--CHANGES IN SECURITIES.............................................................................. 9 ITEM 3--DEFAULTS UPON SENIOR SECURITIES.................................................................... 9 ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 9 ITEM 5--OTHER INFORMATION.................................................................................. 9 ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K................................................................... 9 Exhibit (28) Report of Independent Public Accountants................................................... 18
2 PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Costco Companies, Inc.'s (the "Company" or "Costco"; formerly Price/Costco, Inc.) unaudited condensed consolidated balance sheet as of May 11, 1997, and the condensed consolidated balance sheet as of September 1, 1996, unaudited condensed consolidated statements of operations for the 12- and 36-week periods ended May 11, 1997, and May 12, 1996, and unaudited condensed consolidated statements of cash flows for the 36-week periods then ended are included elsewhere herein. Also, included elsewhere herein are notes to the unaudited condensed consolidated financial statements and the results of the limited review performed by Arthur Andersen LLP, independent public accountants. The Company reports on a 52/53-week fiscal year, consisting of 13 four-week periods and ending on the Sunday nearest the end of August. Fiscal 1997 is a 52-week year with period 13 ending on August 31, 1997. The first, second, and third quarters consist of 12 weeks each and the fourth quarter consists of 16 weeks. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS It is suggested that this management discussion be read in conjunction with the management discussion included in the Company's fiscal 1996 annual report on Form 10-K previously filed with the Securities and Exchange Commission. COMPARISON OF THE 12 WEEKS ENDED MAY 11, 1997 AND MAY 12, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income for the third quarter of fiscal 1997 increased 61% to $66,265, or $0.31 per share (fully diluted), from $41,274, or $0.21 per share (fully diluted), during the third quarter of fiscal 1996. Net sales increased 12% to $4,752,445 during the third quarter of fiscal 1997 from $4,236,207 during the third quarter of fiscal 1996. This increase was primarily due to an increase in comparable warehouse sales and opening a net of 9 warehouses (17 opened--10 new, 7 relocated and 8 closed) since the end of the third quarter of fiscal 1996. Comparable sales, that is sales in warehouses open for at least a year, increased 10 percent during the third quarter of fiscal 1997, reflecting new marketing and merchandising efforts, including the rollout of fresh foods and various ancillary businesses to certain existing locations. Changes in prices of merchandise did not materially contribute to sales increases. Membership fees and other revenue increased 11% to $83,784 or 1.76% of net sales in the third quarter of fiscal 1997 from $75,281 or 1.78% of net sales in the third quarter of fiscal 1996. Membership fees include membership sign-ups at the new warehouses opened since the end of the third quarter of fiscal 1996. The increase in membership fees also reflects the increase in the annual membership fee for the Business "Add-on" members from $15 to $20, effective with renewals in the United States subsequent to April 1, 1996. Currently, there are approximately 3.4 million U.S. Business "Add-on" members. Gross margin (defined as net sales minus merchandise costs) increased 16% to $469,288 or 9.87% of net sales in the third quarter of fiscal 1997 from $406,284 or 9.59% of net sales in the third quarter of fiscal 1996. The 28 basis point increase in gross margin as a percentage of net sales reflects the Company's greater purchasing power, expanded use of its depot facilities, and increased sales penetration of certain higher gross margin ancillary businesses. The gross margin figures reflect accounting for merchandise costs on the last-in, first-out (LIFO) method. The third quarter of fiscal 1997 and 1996 each included a $2,500 LIFO provision. Selling, general and administrative expenses as a percent of net sales decreased to 8.98% during the third quarter of fiscal 1997 from 9.05% during the third quarter of fiscal 1996. This improvement in selling, general and administrative expenses as a percent of net sales was due to the operating expense leverage 3 from the increase in comparable warehouse sales noted above, resulting in a year-over-year improvement at the Company's core warehouse operations and Central and Regional administrative offices. This expense improvement was partially offset by higher expenses as a percent of net sales associated with international expansion and certain ancillary businesses. Preopening expenses totaled $2,458 or .05% of net sales during the third quarter of fiscal 1997 compared to $4,738 or 0.11% of net sales during the third quarter of fiscal 1996. Two warehouses were opened in the third quarter of fiscal 1997 compared to four warehouses opened during last year's third quarter. Preopening expenses also includes costs related to remodel activity, including expanded fresh foods and ancillary operations at existing warehouses. In the third quarter of fiscal 1997 the Company recorded a pre-tax provision for warehouse closing costs of $3,500, or $.01 per share on an after-tax basis (fully diluted), compared to a pre-tax provision for warehouse closing costs of $6,000 or $.02 per share on an after-tax basis (fully diluted) recorded in the third quarter of fiscal 1996. The provisions include estimated closing costs for warehouses closed in the third quarter of each respective fiscal year, including closing costs associated with warehouses which were relocated to new facilities. Interest expense totaled $14,662 in the third quarter of fiscal 1997 compared to $19,194 in the third quarter of fiscal 1996. The decrease in interest expense is primarily related to the call for redemption of both the Company's 6 3/4% ($285.1 million principal amount) and 5 1/2% ($179.3 million principal amount) Convertible Subordinated Debentures during the second quarter of fiscal 1997, which resulted in a net reduction of debt of over $300 million following the completion of these two transactions. See "Note 2-- Debt". Interest income and other totaled $4,055 in the third quarter of fiscal 1997 compared to $2,007 in the third quarter of fiscal 1996. The increase is primarily due to the Company terminating certain unconsolidated joint ventures which had been incurring losses, improved earnings in its Mexico joint venture operation, and a third quarter net gain on the sale of certain excess land parcels. The effective income tax rate on earnings in the second quarter of fiscal 1997 was 39.50% compared to a 41.25% effective tax rate in the third quarter of fiscal 1996. The decrease in the effective tax rate was related primarily to decreases in foreign taxes. COMPARISON OF THE 36 WEEKS ENDED MAY 11, 1997 AND MAY 12, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net operating results for the first 36 weeks of fiscal 1997 reflect net income of $195,524, or $0.92 per share (fully diluted), compared to net income of $162,253, or $0.80 per share (fully diluted), during the first 36 weeks of fiscal 1996. Net income in the first 36 weeks of fiscal 1997 included a non-cash, pretax charge of $65,000 ($38,675 after-tax) reflecting a provision for the impairment of long-lived assets as required by the Company's adoption of Statement of Financial Accounting Standard No. 121. Excluding the $65,000 ($38,675 after-tax) asset impairment charge, net income for the first 36 weeks of fiscal 1997 would have increased 44% to $234,199, or $1.10 per share (fully diluted). The Company also recorded in the first 36 weeks of fiscal 1997 a pretax provision for warehouse closing costs of $8,500, or $.02 per share on an after-tax basis (fully diluted) compared to a warehouse closing provision of $6,000 or $.02 per share on an after-tax basis (fully diluted) for the first 36 weeks of fiscal 1996. These provisions primarily include estimated closing costs for certain warehouses closed in the first 36 weeks of each respective fiscal year and additional costs related to warehouses closed in the prior year. Net sales increased 12% to $14,685,506 during the first 36 weeks of fiscal 1997 from $13,138,139 during the first 36 weeks of fiscal 1996. This increase was primarily due to an increase in comparable warehouse sales and opening a net of 9 warehouses (17 opened--10 new, 7 relocated and 8 closed) since the end of the third quarter of fiscal 1996. Comparable sales, that is sales in warehouses open for at least a 4 year, increased 9 percent during the first 36 weeks of fiscal 1997, reflecting new marketing and merchandising efforts, including the rollout of fresh foods and various ancillary businesses to certain existing locations. Changes in prices of merchandise did not materially contribute to sales increases. Membership fees and other revenue increased to $273,024 or 1.86% of net sales in the first 36 weeks of fiscal 1997 from $245,608 or 1.87% of net sales in the first 36 weeks of fiscal 1996. Membership fees include membership sign-ups at the new warehouses opened since the end of the third quarter of fiscal 1996. The increase in membership fees also reflects the increase in the annual membership fee for the Business "Add-on" members from $15 to $20, effective with renewals in the United States subsequent to April 1, 1996. Currently, there are approximately 3.4 million U.S. Business "Add-on" members. Gross margin (defined as net sales minus merchandise costs) increased 16% to $1,474,770 or 10.04% of net sales in the first 36 weeks of fiscal 1997 from $1,267,108 or 9.64% of net sales in the first 36 weeks of fiscal 1996. The 40 basis point increase in gross margin reflects strong physical inventory results for the 1st half of the fiscal year, the Company's greater purchasing power, expanded use of the Company's depot facilities, improved fresh foods and softlines margins, and increased sales penetration of certain higher gross margin ancillary businesses. The gross margin figures reflect accounting for merchandise costs on the last-in, first-out (LIFO) method. The first 36 weeks of fiscal 1997 and 1996 each include a $7,500 LIFO provision. Selling, general and administrative expenses as a percent of net sales decreased to 8.78% during the first 36 weeks of fiscal 1997 from 8.84% during the first 36 weeks of fiscal 1996. This improvement in selling, general and administrative expenses as a percent of net sales was due to the increase in comparable warehouse sales noted above, and a year-over-year improvement at the Company's core warehouse operations and Central and Regional administrative offices, which was partially offset by higher expenses as a percent of net sales associated with international expansion and certain ancillary businesses. Preopening expenses totaled $18,743 or 0.13% of net sales during the first 36 weeks of fiscal 1997 compared to $20,158 or 0.15% of net sales during the first 36 weeks of fiscal 1996. In the first 36 weeks of fiscal 1997 the Company opened 13 warehouses (including 6 relocated warehouses), compared to 16 warehouses opened during last year's first 36 weeks (including one relocated warehouse). Preopening expenses also includes costs related to remodels, including expanded fresh foods and ancillary operations at existing warehouses. Interest expense totaled $50,839 in the first 36 weeks of fiscal 1997 compared to $54,466 in the first 36 weeks of fiscal 1996. The decrease in interest expense is primarily related to the call for redemption of both the Company's 6 3/4% ($285.1 million principal amount) and 5 1/2% ($179.3 million principal amount) Convertible Subordinated Debentures during the second quarter of fiscal 1997, which resulted in a net reduction of debt of over $300 million following the completion of these two transactions. See "Note 2-- Debt". Interest income and other totaled $11,177 in the first 36 weeks of fiscal 1997 compared to $5,385 in the first 36 weeks of fiscal 1996. The increase is primarily due to the Company's termination of certain unconsolidated joint ventures which had been incurring losses, improved earnings in its Mexico joint venture operation, and a third quarter net gain on the sale of certain excess land parcels. The effective income tax rate on earnings in the first 36 weeks of fiscal 1997 was 40.16% compared to a 41.25% effective tax rate in the first weeks of fiscal 1996. The decrease in the effective tax rate was related primarily to decreases in foreign taxes. 5 LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS) The discussion below contains forward-looking statements that involve risks and uncertainties, and should be read in conjunction with the Company's reports filed previously with the Securities and Exchange Commission. Actual results may differ materially. EXPANSION PLANS Costco's primary requirement for capital is the financing of the land, building and equipment costs for new warehouses plus the costs of initial warehouse operations and working capital requirements, as well as additional capital for international expansion through investments in foreign subsidiaries and joint ventures. While there can be no assurance that current expectations will be realized, and plans are subject to change upon further review, it is management's current intention to spend an aggregate of approximately $400,000 to $425,000 during fiscal 1997 in the United States and Canada for real estate, construction, remodeling and equipment for warehouse clubs and related operations; and approximately $80,000 to $100,000 for international expansion, including the United Kingdom, Asia and other potential ventures. These expenditures will be financed with a combination of cash provided from operations, the use of cash and cash equivalents (which totaled $136,660 at May 11, 1997), short-term borrowings under revolving credit facilities and/or commercial paper facilities, and other financing sources as required. A total of approximately $391,000 has been spent on capital expenditures during the first 36 weeks of fiscal 1997. Expansion plans for the United States and Canada during fiscal 1997 are to open approximately 19 new warehouse clubs, including seven relocations. Through the end of the first 36 weeks of fiscal 1997, the Company has opened 12 warehouses in the United States (including the relocation of 6 warehouses), closed outright one warehouse in Canada, and opened one warehouse in Taiwan in January 1997. The Company expects to continue expansion of its international operations and plans to open one additional unit in the United Kingdom through its 60%-owned subsidiary during the fourth quarter of fiscal 1997. Other international markets are being assessed, particularly in the Pacific Rim. Costco Companies, Inc. and its Mexico-based joint venture partner, Controladora Comercial Mexicana, each own a 50% interest in Price Club Mexico following the Company's acquisition of Price Enterprises' interest in Price Club Mexico in April, 1995. Price Club Mexico's expansion plans include the opening of one additional warehouse club prior to the end of the calendar year. As of May 11, 1997, Price Club Mexico operated 13 Price Club warehouses in Mexico. BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS (ALL AMOUNTS STATED IN US DOLLARS) The Company has a domestic multiple-option loan facility with a group of 12 banks, which provides for borrowings of up to $500,000 or standby support for a $500,000 commercial paper program. Of this amount, $250,000 expires on January 26, 1998, and $250,000 expires on January 30, 2001. The interest rate on bank borrowings is based on LIBOR or rates bid at auction by the participating banks. At May 11, 1997, no amount was outstanding under the loan facility and $171,000 was outstanding under the commercial paper program. In addition, a wholly-owned Canadian subsidiary has a $144,000 commercial paper program supported by a $101,000 bank credit facility with three Canadian banks, of which $61,000 will expire in March 1998 and $40,000 will expire in March 1999. The interest rate on bank borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At May 11, 1997, no amount was outstanding under the bank credit facility and $55,000 was outstanding under the Canadian commercial paper program. 6 The Company has agreed to limit the combined amount outstanding under the U.S. and Canadian commercial paper programs to the $601,000 combined amounts of the respective supporting bank credit facilities. LETTERS OF CREDIT The Company also has separate letter of credit facilities (for commercial and standby letters of credit), totaling approximately $184,000. The outstanding commitments under these facilities at May 11, 1997 totaled approximately $103,000, including approximately $44,000 in standby letters of credit for workers' compensation requirements. REDEMPTION/CONVERSION OF CONVERTIBLE SUBORDINATED DEBENTURES On November 19, 1996, The Price Company, a wholly-owned subsidiary of the Company, called for redemption all $285,100 of its 6 3/4% Convertible Subordinated Debentures due 2001. On the redemption date, December 4, 1996, approximately $159,400 principal amount of the Debentures were converted into approximately 7.1 million shares of Costco Companies, Inc. Common Stock and the remaining $125,700 of Debentures were redeemed at a total cost of $130,300 (including accrued interest and redemption premium). The redemption portion of the transaction was financed with short-term bank borrowings. On December 16, 1996, The Price Company called for redemption all $179,300 of its 5 1/2% Convertible Subordinated Debentures due 2012. On the redemption date, January 6, 1997, approximately $142,700 principal amount of the Debentures were converted into approximately 6.0 million shares of Costco Companies, Inc. Common Stock and the remaining $36,600 of Debentures were redeemed at a total cost of $37,500 (including accrued interest and redemption premium). The redemption portion of the transaction was paid with cash on hand. FINANCIAL POSITION AND CASH FLOWS Due to rapid inventory turnover, the Company's operations provide a higher level of supplier trade payables in relation to inventory than generally encountered in other forms of retailing. When combined with other current liabilities, the resulting amount typically approaches or exceeds the current assets needed to operate the business (e.g., merchandise inventories, accounts receivable and other current assets). The working capital deficit totaled approximately ($66,000) at May 11, 1997, compared to working capital of $57,000 at September 1, 1996. Net cash provided by operating activities totaled $368,041 in the first 36 weeks of fiscal 1997 compared to $239,804 in the first 36 weeks of fiscal 1996. The increase in net cash from operating activities is primarily a result of increased net income, adjusted for the non-cash provision for asset impairments, and reduced net inventory requirements during the first 36 weeks of this fiscal year versus last fiscal year. Net cash used in investing activities totaled $374,410 in the first 36 weeks of fiscal 1997 compared to $369,396 in the first 36 weeks of fiscal 1996. The investing activities primarily related to additions to property and equipment for new and remodeled warehouses of $391,008 and $354,469 in the first 36 weeks of fiscal 1997 and 1996, respectively. Net cash provided by financing activities totaled $39,775 in the first 36 weeks of fiscal 1997 compared to $164,291 in the first 36 weeks of fiscal 1996. This decrease is primarily the result of utilizing borrowings to finance the repayment of long-term debt in fiscal 1997 compared to investments in property and equipment in fiscal 1996. The Company's balance sheet as of May 11, 1997 reflects a $347,103 or 7% increase in total assets since September 1, 1996. The increase is primarily due to a net increase in property and equipment and merchandise inventory primarily related to the Company's expansion program. 7 PART II--OTHER INFORMATION (DOLLARS IN THOUSANDS) ITEM 1. LEGAL PROCEEDINGS On April 6, 1992, The Price Company was served with a Complaint in an action entitled FECHT ET AL. V. THE PRICE COMPANY ET AL., Case No. 92-497, United States District Court, Southern District of California (the "Court"). Subsequently, on April 22, 1992, The Price Company was served with a First Amended Complaint in the action. The case was dismissed without prejudice by the Court on September 21, 1992, on the grounds the plaintiffs had failed to state a sufficient claim against defendants. Subsequently, plaintiffs filed a Second Amended Complaint which, in the opinion of the Company's counsel, alleged substantially the same facts as the prior complaint. The Complaint alleged violation of certain state and federal laws during the time period prior to The Price Company's earnings release for the second quarter of fiscal year 1992. The case was dismissed with prejudice by the Court on March 9, 1993, on grounds the plaintiffs had failed to state a sufficient claim against defendants. Plaintiffs filed an Appeal in the Ninth Circuit Court of Appeals. In an opinion dated November 20, 1995, the Ninth Circuit reversed and remanded the lawsuit. In February 1997, the Court granted the plaintiffs' motion for certification of a class consisting of all purchasers of the Common Stock of The Price Company from April 3, 1991 through April 2, 1992. The Company believes that this lawsuit is without merit and is vigorously defending the lawsuit. The Company does not believe that the ultimate outcome of such litigation will have a material adverse effect on the Company's financial position or results of operations. On December 19, 1994, a Complaint was filed against PriceCostco and certain current and former directors in an action entitled SNYDER V. PRICE/COSTCO, INC. ET. AL., Case No. C94-1874Z, United States District Court, Western District of Washington. On January 4, 1995, a Complaint was filed against PriceCostco in an action entitled BALSAM V. PRICE/COSTCO, INC. ET. AL., Case No. C95-0009Z, United States District Court, Western District of Washington. The Snyder and Balsam Cases were subsequently consolidated and on March 15, 1995, plaintiffs' counsel filed a First Amended And Consolidated Class Action And Derivative Complaint. On November 9, 1995, plaintiffs' counsel filed a Second Amended And Consolidated Class Action And Derivative Complaint. The Second Amended Complaint alleged violation of certain state and federal laws arising from the spin-off and exchange transaction (whereby Price Enterprises, Inc. became a separate, publicly-traded company), and the merger between Costco and The Price Company. In July 1996, an agreement in principle was reached to resolve the lawsuit, and by Order dated April 28, 1997, the Court approved the settlement and dismissed the lawsuit with prejudice. The resolution involves the transfer from Price Enterprises, Inc. to the Company of certain intangible assets, including elimination of certain existing non-compete restrictions and operating agreements and the termination or amendment of certain trademark license and assignment agreements. The cash portion of the settlement was funded by the Company's director and officer insurance coverage and by Price Enterprises. The Company contributed no money to the settlement. In May 1996, the Company reached an agreement in principle with the Environmental Protection Agency and the U.S. Department of Justice to settle an enforcement action under the Federal Clean Air Act. The action is based on claims that the Company failed to maintain required documentation related to its sale of freon products. Under the terms of the proposed settlement, the Company agreed to pay a civil penalty of $232 and to comply with federal regulations relating to the sale of ozone-depleting substances. The settlement was finalized by a Consent Decree entered in March 1997 and the settlement payment was made in April 1997. The Company is involved from time to time in claims, proceedings and litigation arising from its business and property ownership. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position or results of operations. 8 ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein or incorporated by reference: (27) Financial Data Schedule (28) Report of Independent Public Accountants (b) No reports on Form 8-K were filed for the 12 weeks ended May 11, 1997. 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REGISTRANT COSTCO COMPANIES, INC. Date: May 30, 1997 /s/ JAMES D. SINEGAL --------------------------------------------- James D. Sinegal PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: May 30, 1997 /s/ RICHARD A. GALANTI --------------------------------------------- Richard A. Galanti EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER
10 COSTCO COMPANIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
MAY 11, 1997 SEPTEMBER 1, 1996 -------------- ------------------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents............... $ 136,660 $ 101,955 Receivables, net........................ 131,038 137,467 Merchandise inventories, net............ 1,647,216 1,500,842 Other current assets.................... 78,636 88,040 -------------- ------------------- Total current assets.................. 1,993,550 1,828,304 -------------- ------------------- PROPERTY AND EQUIPMENT Land and land rights.................... 1,089,993 1,055,208 Buildings and leasehold and land improvements.......................... 1,855,716 1,667,697 Equipment and fixtures.................. 819,371 716,448 Construction in progress................ 64,691 104,183 -------------- ------------------- 3,829,771 3,543,536 Less accumulated depreciation and amortization.......................... (749,793) (655,226) -------------- ------------------- Net property and equipment............ 3,079,978 2,888,310 -------------- ------------------- OTHER ASSETS............................ 185,436 195,247 -------------- ------------------- $5,258,964 $4,911,861 -------------- ------------------- -------------- ------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank checks outstanding................. $ 6,356 $ 22,330 Short-term borrowings................... 225,471 59,928 Accounts payable........................ 1,307,035 1,220,426 Accrued salaries and benefits........... 268,385 256,951 Accrued sales and other taxes........... 97,398 84,545 Other current liabilities............... 155,032 127,414 -------------- ------------------- Total current liabilities............. 2,059,677 1,771,594 LONG-TERM DEBT.......................... 760,010 1,229,221 DEFERRED INCOME TAXES AND OTHER LIABILITIES........................... 36,742 60,902 -------------- ------------------- Total liabilities..................... 2,856,429 3,061,717 -------------- ------------------- MINORITY INTERESTS...................... 89,197 72,346 -------------- ------------------- STOCKHOLDERS' EQUITY Preferred stock $.01 par value; 100,000,000 shares authorized; no shares issued and outstanding......... -- -- Common stock $.01 par value; 900,000,000 shares authorized; 212,143,000 and 196,436,000 shares issued and outstanding........................... 2,121 1,964 Additional paid-in capital.............. 666,515 321,832 Accumulated foreign currency translation........................... (76,707) (71,883) Retained earnings....................... 1,721,409 1,525,885 -------------- ------------------- Total stockholders' equity............ 2,313,338 1,777,798 -------------- ------------------- $5,258,964 $4,911,861 -------------- ------------------- -------------- -------------------
The accompanying notes are an integral part of these financial statements. 11 COSTCO COMPANIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
12 WEEKS ENDED 36 WEEKS ENDED ----------------------------- ------------------------------ MAY 11, 1997 MAY 12, 1996 MAY 11, 1997 MAY 12, 1996 ------------ --------------- ------------- --------------- REVENUE Net sales......................................... $4,752,445 $ 4,236,207 $ 14,685,506 $ 13,138,139 Membership fees and other......................... 83,784 75,281 273,024 245,608 ------------ --------------- ------------- --------------- Total revenue................................... 4,836,229 4,311,488 14,958,530 13,383,747 OPERATING EXPENSES Merchandise costs................................. 4,283,157 3,829,923 13,210,736 11,871,031 Selling, general and administrative............... 426,980 383,387 1,289,119 1,161,303 Preopening expenses............................... 2,458 4,738 18,743 20,158 Provision for impaired assets and warehouse closing costs................................... 3,500 6,000 73,500 6,000 ------------ --------------- ------------- --------------- Operating income................................ 120,134 87,440 366,432 325,255 OTHER INCOME (EXPENSE) Interest expense.................................. (14,662) (19,194) (50,839) (54,466) Interest income and other......................... 4,055 2,007 11,177 5,385 ------------ --------------- ------------- --------------- INCOME BEFORE PROVISION FOR INCOME TAXES.......... 109,527 70,253 326,770 276,174 Provision for income taxes........................ 43,262 28,979 131,246 113,921 ------------ --------------- ------------- --------------- NET INCOME........................................ $ 66,265 $ 41,274 $ 195,524(a) $ 162,253 ------------ --------------- ------------- --------------- ------------ --------------- ------------- --------------- NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE-- FULLY DILUTED: Net income........................................ $ 0.31 $ 0.21 $ 0.92(a) $ 0.80 ------------ --------------- ------------- --------------- ------------ --------------- ------------- --------------- Shares used in calculation (000's)................ 216,362 218,336 218,433 218,145 ------------ --------------- ------------- --------------- ------------ --------------- ------------- ---------------
- - ------------------------ (a) Net income and net income per common and common equivalent share would have been $234,199 and $1.10, respectively, without the effect of adopting FAS No. 121, using 225,706 fully-diluted shares. The accompanying notes are an integral part of these financial statements. 12 COSTCO COMPANIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
36 WEEKS ENDED ----------------------------- MAY 11, 1997 MAY 12, 1996 ------------ --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................................................ $ 195,524 $ 162,253 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................... 122,429 109,714 Provision for asset impairments................................................. 65,000 -- Increase in merchandise inventories............................................. (150,123) (79,758) Increase (decrease) in accounts payable......................................... 90,615 (37,876) Other........................................................................... 44,596 85,471 ------------ --------------- Total adjustments............................................................. 172,517 77,551 ------------ --------------- Net cash provided by operating activities....................................... 368,041 239,804 ------------ --------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment............................................... (391,008) (354,469) Proceeds from the sale of property and equipment.................................. 19,416 3,363 Investment in unconsolidated joint ventures....................................... -- (5,000) Other............................................................................. (2,818) (13,290) ------------ --------------- Net cash used in investing activities........................................... (374,410) (369,396) ------------ --------------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from short-term borrowings........................................... 167,751 21,335 Decrease in bank checks outstanding............................................... (16,039) (11,670) Net proceeds from long-term borrowings............................................ 2,570 139,253 Payments on long-term debt and notes payable...................................... (169,618) (2,100) Proceeds from minority interests, net............................................. 16,545 9,512 Exercise of stock options, including income tax benefit........................... 38,566 7,961 Other............................................................................. -- -- ------------ --------------- Net cash provided by financing activities....................................... 39,775 164,291 ------------ --------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH........................................... 1,299 144 ------------ --------------- Net increase in cash and cash equivalents....................................... 34,705 34,843 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................... 101,955 45,688 ------------ --------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ 136,660 $ 80,531 ------------ --------------- ------------ --------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amounts capitalized) (a)....................................... $ 55,791 $ 39,134 Income taxes.................................................................... 126,178 111,201
- - ------------------------ (a) Semi-annual interest payments on the 5 1/2% and 6 3/4% convertible debentures were paid on September 3, 1996, subsequent to the beginning of the first quarter of fiscal 1997, which began September 2, 1996. In fiscal year 1996, these interest payments were paid prior to the first quarter, which began on September 4, 1995. The accompanying notes are an integral part of these financial statements. 13 COSTCO COMPANIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The unaudited consolidated financial statements include the accounts of Costco Companies, Inc., a Delaware corporation, and its subsidiaries ("Costco Companies, Inc." or the "Company"). Costco Companies, Inc. is a holding company which operates primarily through its major subsidiaries, The Price Company and subsidiaries ("Price"), and Costco Wholesale Corporation and subsidiaries ("Costco"). All intercompany transactions between the Company and its subsidiaries have been eliminated in consolidation. Price and Costco primarily operate cash and carry membership warehouses, primarily under the "Costco Wholesale" name. Costco Companies, Inc. operates membership warehouses that offer very low prices on a limited selection of nationally-branded and selected private label products in a wide range of merchandise categories in no-frills, self-service warehouse facilities. As of May 11, 1997, Costco Companies, Inc. operated 258 warehouses under the "Costco Wholesale" and "Price Club" names: 198 warehouses in the United States (23 states), 54 warehouses in nine Canadian provinces, five warehouses in the United Kingdom, and one warehouse in Taiwan. As of May 11, 1997, the Company also operated (through a 50%-owned joint venture) 13 warehouses in Mexico and had a license agreement for the operation of a membership warehouse in Seoul, Korea. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission. While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report filed on Form 10-K for the fiscal year ended September 1, 1996. FISCAL YEARS The Company reports on a 52/53-week fiscal year, ending on the Sunday nearest the end of August. Fiscal 1997 is a 52-week fiscal year, with the first, second and third quarters consisting of 12 weeks each and the fourth quarter, ending August 31, 1997, consisting of 16 weeks. MERCHANDISE INVENTORIES Merchandise inventories are recorded at the lower of cost or market as determined by the retail inventory method, and are stated using the last-in, first-out (LIFO) method for U.S. merchandise inventories, and the first-in, first-out (FIFO) method for foreign merchandise inventories. If the FIFO method had been used, merchandise inventory would have been $23,650 higher at both May 11, 1997 and May 12, 1996. The Company provides for estimated inventory losses between physical inventory counts on the basis of a standard percentage of sales. This provision is adjusted to reflect the actual shrinkage results of physical inventory counts which generally occur in the second and fourth fiscal quarters. 14 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share is based on the weighted average number of common and common equivalent shares outstanding. The calculation for the 12- and 36-week periods ended May 12, 1996 and the 36-week period ended May 11, 1997, eliminates interest expense, net of income taxes, on the 5 1/2% convertible subordinated debentures (primary and fully diluted) prior to the December 4, 1996 redemption date, the 6 3/4% convertible subordinated debentures (fully diluted only) prior to the January 6, 1997 redemption date, and includes the additional shares issuable upon conversion of these debentures. ADOPTION OF FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 121 The Company adopted Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " (SFAS No. 121), as of the first quarter of fiscal 1997. In accordance with SFAS No. 121, the Company recorded a pretax, non-cash charge of $65,000 reflecting its estimate of impairment relating principally to excess property and closed warehouses. The charge reflects the difference between carrying value and fair-market value, which was based on market valuations for those assets whose carrying value was not recoverable through future cash flows. RECENT ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" (SFAS No. 128). SFAS No. 128 establishes new standards for computing and presenting earnings per share (EPS) for entities with publicly-held common stock. The Company is required to adopt SFAS No. 128 at the beginning of fiscal 1998. If the provisions of SFAS No. 128 had been used to calculate EPS for the 12- and 36-weeks ended May 11, 1997 and May 12, 1996, proforma EPS would have been:
12 WEEKS ENDED 36 WEEKS ENDED -------------------------------- -------------------------------- MAY 11, 1997 MAY 12, 1996 MAY 11, 1997 MAY 12, 1996 --------------- --------------- --------------- --------------- Basic............................... $ 0.31 $ 0.21 $ 0.95 $ 0.83 ----- ----- ----- ----- ----- ----- ----- ----- Diluted............................. $ 0.31 $ 0.21 $ 0.93 $ 0.80 ----- ----- ----- ----- ----- ----- ----- -----
RECLASSIFICATIONS Certain reclassifications have been reflected in the financial statements in order to conform prior years to the current year presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 15 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (2)--DEBT BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS The Company has a domestic multiple-option loan facility with a group of 12 banks, which provides for borrowings of up to $500,000 or standby support for a $500,000 commercial paper program. Of this amount, $250,000 expires on January 26, 1998, and $250,000 expires on January 30, 2001. The interest rate on bank borrowings is based on LIBOR or rates bid at auction by the participating banks. At May 11, 1997, no amount was outstanding under the loan facility and $171,000 was outstanding under the commercial paper program. In addition, a wholly-owned Canadian subsidiary has a $144,000 commercial paper program supported by a $101,000 bank credit facility with three Canadian banks, of which $61,000 will expire in March 1998 and $40,000 will expire in March 1999. The interest rate on bank borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At May 11, 1997, no amount was outstanding under the bank credit facility and $55,000 was outstanding under the Canadian commercial paper program. The Company has agreed to limit the combined amount outstanding under the U.S. and Canadian commercial paper programs to the $601,000 combined amounts of the respective supporting bank credit facilities. LETTERS OF CREDIT The Company also has separate letter of credit facilities (for commercial and standby letters of credit), totaling approximately $184,000. The outstanding commitments under these facilities at May 11, 1997 totaled approximately $103,000, including approximately $44,000 in standby letters of credit for workers' compensation requirements. REDEMPTION/CONVERSION OF CONVERTIBLE SUBORDINATED DEBENTURES On November 19, 1996, The Price Company, a wholly-owned subsidiary of the Company, called for redemption all $285,100 of its 6 3/4% Convertible Subordinated Debentures due 2001. On the redemption date, December 4, 1996, approximately $159,400 principal amount of the Debentures were converted into approximately 7.1 million shares of Costco Companies, Inc. Common Stock and the remaining $125,700 of Debentures were redeemed at a total cost of $130,300 (including accrued interest and redemption premium). The redemption portion of the transaction was financed with short-term bank borrowings. On December 16, 1996, The Price Company called for redemption all $179,300 of its 5 1/2% Convertible Subordinated Debentures due 2012. On the redemption date, January 6, 1997, approximately $142,700 principal amount of the Debentures were converted into approximately 6.0 million shares of Costco Companies, Inc. Common Stock and the remaining $36,600 of Debentures were redeemed at a total cost of $37,500 (including accrued interest and redemption premium). The redemption portion of the transaction was paid with cash on hand. 16 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (3)--INCOME TAXES The following is a reconciliation of the federal statutory income tax rate to the effective income tax rate for income before income taxes:
36 WEEKS ENDED 36 WEEKS ENDED MAY 11, 1997 MAY 12, 1996 --------------------- --------------------- Federal statutory income tax rate................................. $ 114,370 35.00% $ 96,661 35.00% State, foreign and other income taxes, net........................ 16,876 5.16% 17,260 6.25% ---------- --------- ---------- --------- $ 131,246 40.16% $ 113,921 41.25% ---------- --------- ---------- --------- ---------- --------- ---------- ---------
NOTE (4)--COMMITMENTS AND CONTINGENCIES The Company is involved from time to time in claims, proceedings and litigation arising from its business and property ownership. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position or results of operations. See Legal Proceedings on page 8 for outstanding legal matters. 17 EX-27 2 EXHIBIT 27 FDS
5 1,000 9-MOS AUG-31-1997 SEP-02-1996 MAY-11-1997 136,660 0 134,933 3,895 1,647,216 1,993,550 3,829,771 749,793 5,258,964 2,059,677 760,010 0 0 668,636 1,644,702 5,258,964 14,685,506 14,958,530 13,210,736 14,592,098 0 0 50,839 326,770 131,246 195,524 0 0 0 195,524 .93 .92
EX-28 3 EXHIBIT 28 EXHIBIT 28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Costco Companies, Inc.: We have reviewed the accompanying condensed consolidated balance sheet of Costco Companies, Inc. (a Delaware corporation) and subsidiaries as of May 11, 1997, and the related condensed consolidated statements of operations for the twelve-week and thirty-six-week periods ended May 11, 1997 and May 12, 1996, and the condensed consolidated statements of cash flows for the thirty-six-week periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Seattle, Washington May 27, 1997 18 -----END PRIVACY-ENHANCED MESSAGE-----